Negotiable Instruments Multiple Choice Answers

1. (a) A draft is a written instrument in which a drawer unconditionally orders a specified drawee to pay a certain sum of money to a payee. Thus, a draft is an order to pay. A certificate of deposit is a note signed by a bank acknowledging the receipt of money and promising to repay with interest. All notes, including a certificate of deposit, are a promise made by that party to pay, not an order for a 3^rdparty to pay. Only answer (a) states a draft is an order to pay, but a certificate of deposit is not.

2. (b) To be negotiable an instrument must be signed by maker or drawer, be unconditional, be payable in a certain sum of money, be payable to bearer or order and be payable on demand or at a definite time. This instrument meets all five requirements. It is a note because it is a two party deal with Craig Burke promising to pay ("I promise to pay"). It is bearer paper because it is pay to the order of cash. Thus the instrument is a negotiable bearer note. Answer (a) is incorrect because it is negotiable as soon as all five tests are met. It is negotiable now, but not payable until December 1. Answer (c) is incorrect because a draft is a three party deal and there are not three parties. Answer (d) is incorrect because reference to collateral or security will not prevent an instrument from being negotiable.

3. (a) The instrument is a draft because it is a three party deal whereby Lynn Dexter ordered Middlesex National Bank to pay Robert Silver. Answer (b) is incorrect because a check is a type of a draft, drawn on a bank and payable on demand. This instrument was drawn on September 15 and payable on October 1 and therefore was not payable on demand. Answer (c) is incorrect because a trade acceptance is drawn by a seller ordering a buyer to pay. The seller is usually both the drawer and payee and the buyer is the drawee who accepts in the lower left hand corner of the instrument. This instrument reflects none of these requirements. Answer (d) is incorrect because a note is a two party deal and this has three parties.

4. (d) Trade acceptances are one of the types of drafts under Article 3, the Commercial Paper article of the UCC.

Answers (a) and (c) are incorrect because documents of title to include warehouse receipts are not commercial paper. They are governed by Article 7 not Article 3. Answer (b) is not correct because a promissory note is commercial paper, but notes are not drafts.

5. (b) To be negotiable an instrument must be signed by maker or drawer, be unconditional, be payable in a certain sum of money, be payable to bearer or order and be payable on demand or at a definite time. This instrument meets all five requirements. It is a draft because three parties are involved. Dale Cox ordered Union Corp. to pay Donald Kent. It is a time draft because it is payable at a definite time in the future. Thus, this is a negotiable time draft. Answer (a) is incorrect because a reference to the reason the instrument is written (as a down payment) will not make an instrument negotiable. If it was subject to another agreement it would be non-negotiable. Answer (c) is incorrect because a sight draft is payable on demand and this is payable at a definite time in the future. Answer (d) is incorrect because it is negotiable and it is not a trade acceptance. The seller is not both the drawer and the payee and the buyer did not accept in the lower left hand corner.

6. (a) A certificate of deposit is an acknowledgment by a bank of receipt of money with the promise to repay with interest. Since it is a type of a note, there are only two parties involved. Answers (b), (c) and (d) are incorrect because a time draft, a trade acceptance or banker’s acceptance and a cashier’s check are all types of drafts and need three parties.

7. (c) A trade acceptance is drawn by a seller ordering the buyer to pay. Answer (a) is incorrect because a trade acceptance obligates the buyer to pay, not the seller. Answers (b) and (d) are incorrect because a trade acceptance is drawn by a seller, not a buyer.

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8. (c) To be negotiable an instrument must be signed by maker or drawer, be unconditional, be payable in a certain sum of money, be payable to bearer or order and be payable on demand or at a definite time. This instrument meets all five requirements. It is a draft. Smith Industries is the drawer, Frank Supply Co. is the payee and Clark Novelties is the drawee. The drawee, Clark Novelties, became primarily liable on the date of acceptance, April 20. Since the drawer is secondarily liable, no one was primarily liable on the date of issuance, April 12. Answer (a) is incorrect because the drawer, Smith, is secondarily liable, not primarily liable. Answer (b) is incorrect because the instrument is negotiable. Answer (d) is incorrect because Smith is the drawer and has secondary liability and must pay upon presentment and notice of dishonor if Clark does not.

9. (b) Installment notes are one of the types of commercial paper under Article 3 of the UCC. Answers (c) and (d) are incorrect because documents of title to include warehouse receipts and bills of lading are not commercial paper. They are governed by Article 7 not Article 3. Answer (a) is incorrect because investment securities to include bonds are not commercial paper. They are governed by Article 8, not Article 3.

10. (d) A draft is one type of commercial paper under Article 3 of the UCC. Answer (a) is incorrect because documents of title are not commercial paper. They are governed by Article 7, not Article 3. Answer (b) is incorrect because investment securities are not commercial paper. They are governed by Article 8, not Article 3.

Answer (c) is incorrect because currency is not commercial paper, although commercial paper must be payable in currency.

11. (d) An investment security is not commercial paper. It is governed by Article 8 of the UCC, not Article 3.

Answers (a), (b) and (c) are incorrect because notes, drafts and certificates of deposit are all types of commercial paper under Article 3.

12. (d) For an instrument to be negotiable, it must be an unconditional promise or order. If it is subject to another agreement or transaction it is non-negotiable. Answer (a) is incorrect because references to collateral will not prevent negotiability unless it is subject to the terms of that collateral. Answer (b) is incorrect because waiver of trial by jury does not make the note conditional and thus does not affect negotiability. Answer (c) is incorrect because prepayment will not prevent negotiability.

13. (a) To be negotiable an instrument must be signed by maker or drawer, be unconditional, be payable in a certain sum of money, be payable to bearer or order and be payable on demand or at a definite time. Thus, for an instrument to be negotiable it must be payable to order or to bearer. (Note: checks may omit the word

"order" and still be negotiable.) Answer (b) is incorrect because it is the maker or drawer that must sign, not the payee. Answer (c) is incorrect because there is no require that the instrument contain any reference to agreements between the parties to be negotiable. Answer (d) is incorrect because an instrument must be unconditional to be negotiable and may not contain necessary conditions of payment.

14. (d) To be negotiable an instrument must be signed by maker or drawer, be unconditional, be payable in a certain sum of money, be payable to bearer or order and be payable on demand or at a definite time. This instrument meets all five requirements and must be payable in a certain sum of money. Answer (a) is incorrect because "fifty days after date, or sooner" and dated April 15, is a definite enough time. Answer (b) is incorrect because $4,000 plus ten percent interest is a certain enough sum of money. Answer (c) is incorrect because reference to collateral or security does not make an instrument negotiable, nor will it prevent negotiability.

15. (b) To be negotiable an instrument other than a check must be payable to bearer or order. This instrument is not negotiable because it is not payable to bearer or order. It is not payable to bearer because by its terms it is only payable to Bill North. It is not payable to order because the word order is missing. Answer (a) is incorrect because an instrument with no date is considered to be payable upon demand and therefore negotiable. Answers (c) and (d) are incorrect because the instrument is not negotiable.

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16. (d) To be negotiable an instrument must be signed by maker or drawer, be unconditional, be payable in a certain sum of money, be payable to bearer or order and be payable on demand or at a definite time. This instrument meets all five requirements. Specifically, an instrument is negotiable if the amount in words and the amount in numbers differ. The amount in words controls. Answer (a) is incorrect because the instrument is negotiable. Answer (b) is incorrect because an instrument need not state the reason that it is being written to be negotiable. Thus, the blank line after the word "For" will not prevent negotiability. Answer (c) is incorrect because this instrument is a note ("the undersigned promises to pay"), not a draft.

17. (a) To be negotiable an instrument must be payable on demand or at a definite time. Payment "10 days after the sale of my two carat diamond ring" is neither on demand nor at a definite time. Answer (b) is incorrect because reference to collateral or security will not prevent an instrument from being negotiable. Answers (c) and (d) are incorrect because the instrument is not negotiable.

18. (a) To be negotiable an instrument must be payable on demand or at a definite time. Payment six months after the death of the maker is neither on demand nor at a definite time. Answer (b) is incorrect because an acceleration clause will not prevent negotiability. Answer (c) is incorrect because a postdated instrument would still be payable at a definite time and would therefore be negotiable. Answer (d) is incorrect because reference to collateral or security will not prevent negotiability.

19. (b) To be negotiable an instrument must be signed by maker or drawer, be unconditional, be payable in a certain sum of money, be payable to bearer or order and be payable on demand or at a definite time. This instrument meets all five requirements. It is a note because it is a two party deal ("I promise to pay"). Answer (a) is incorrect because reference to collateral or security will not prevent negotiability. Answer (c) is incorrect because neither prepayment nor payment of collection costs will prevent negotiability. Answer (d) is incorrect because this is payable in a certain sum of money and thus is a negotiable promissory note. It is not an investment security.

20. (d) To be negotiable an instrument must be payable in a certain sum of money. It must be money and nothing else. Payment by "services or by the payment of money" would make the instrument non-negotiable.

Answer (a) is incorrect because payment at a definite time and extension to another definite time will not prevent negotiability. Answer (b) is incorrect because acceleration clauses will not prevent negotiability. Answer (c) is incorrect because a power of attorney is a written authorization for one to act on behalf of another. An agent with a valid power of attorney could properly sign on behalf of the maker of a note.

21. (c) Endorsing "without recourse" is a qualified endorsement and eliminates all contract liability. Answers (a) and (d) are incorrect because nothing placed on the back of a negotiable instrument will prevent further negotiation. Specifically (a) is incorrect because Carl Bass is an accommodation endorser who added his name to this instrument so it could be cashed. Accommodation endorsers facilitate negotiation, rather than preventing it.

Answer (b) is incorrect because the mere signature of John Davis to an instrument payable to John Davis is a blank endorsement. A blank endorsement makes the instrument bearer paper. Answer (d) is incorrect because "for deposit" is a restrictive endorsement and does not prevent further negotiation.

22. (c) Signing without endorsing to a specified party is a blank endorsement, not special. "Without recourse" is a qualified endorsement. "For collection only" is a restrictive endorsement. Thus, this is a blank, qualified and restrictive endorsement. The only answer that reflects this is (c).

23. (d) The first endorsement on the back made the instrument payable to John Smith. John’s signature without endorsing to a specified party was a blank endorsement that made the instrument bearer paper.

Bearer paper can be negotiated by delivery alone and therefore the signature of Mary Harris was not required. Answers (a) and (b) are incorrect because once an instrument is negotiable on its front, nothing placed on the back will make it nonnegotiable. Answer (c) is incorrect because endorsing "without recourse" is a qualified endorsement and doesn’t prevent further negotiation.

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24. (d) The first endorsement on the back made the instrument payable to Sam North. The only other endorsement is Sam North’s signature without endorsing to a specified party. This made the note bearer paper and it can be negotiated by delivery alone. Answer (a) is incorrect because Clark’s signature would only be required if someone made the note payable to Clark. Answer (b) is incorrect because to negotiate bearer paper requires only delivery. To be an HIDC Clark would have to have given value, but Clark can negotiate the note without being an HIDC. Answer (c) is incorrect because "without recourse" is a qualified endorsement and doesn’t make the note nonnegotiable. Once a note is negotiable on its front, nothing placed on the back will make it nonnegotiable.

25. (c) To negotiate bearer paper requires mere delivery. It does not require an endorsement or consideration.

The only answer that reflects this is (c).

26. (b) On Wolf’s receipt of the note, it was "pay to the order of Ian Wolf" which is order paper. When Wolf signed without endorsing to a specified party, it was a blank endorsement which made the instrument bearer paper. The next endorsement was to pay George Vernon (signed) Samuel Thorn, which was a special endorsement making the instrument order paper. George Vernon endorsed to make the note payable to Alan Yule. This is a special endorsement which makes the instrument order paper. The last signature is Alan Yule without endorsing to a specified party. This is a blank endorsement which makes the note bearer paper. The only answer that reflects this sequence is (b).

27. (c) An endorser, such as Mary Frank, has secondary liability. Secondary liability means the endorser is liable only after presentment and notice of dishonor. Thus, Bass would have to give Frank notice of dishonor to hold her secondarily liable. Answers (a) and (b) are incorrect because by signing the instrument Peters has contract liability, whether his signature was required or not. All endorsers, with the exception of a qualified endorser, have secondary liability to subsequent transferees. Thus, Peters is secondarily liable to both Frank and Bass. Answer (d) is incorrect because an endorser only has secondary liability to subsequent parties, not prior parties like Peters and Frank.

28. (b) Contract liability is liability from signing the instrument and is a guarantee of payment. One who endorses "without recourse" (a qualified endorser) has no contract liability and therefore makes no guarantee of payment. Although a qualified endorsement eliminates contract liability, it does not eliminate warranty liability. Answer (a) and (c) are incorrect because a qualified endorser does have warranty liability.

Answer (d) is incorrect because to convert a check to order paper it must be endorsed to a specified party.

Endorsing "without recourse" does not endorse an instrument to a specified party.

29. (d) Certification of a check by a bank discharges all prior parties. Answers (a) and (b) are incorrect because presentment and notice of dishonor are not needed for one who guarantees payment. Thus, George Hopkins would not be discharged. Answer (c) is incorrect because insolvency of the maker would release just the maker from liability, not endorsers.

30. (a) Contract liability is liability from signing the instrument and is a guarantee of payment. Faye Smith signed the instrument as an unqualified endorser and therefore has contract liability and guaranteed payment.

Since the instrument was endorsed "Pay to John Doe", the instrument is order paper and may be further negotiated by delivery and John’s endorsement. The only answer that reflects that payment is guaranteed and that the instrument may be further negotiated is (a).

31. (d) To be a holder one need only have possession of a negotiable bearer instrument. Answer (a) is incorrect because one could receive a check that was payable to order and still be a holder. Answers (b) and (c) are incorrect because they relate to elements required to be a holder in due course, not requirements to be a holder.

32. (c) A holder is simply one who possesses a negotiable instrument. Negotiation of order paper requires delivery plus an endorsement. Thus, both possession and a proper endorsement are required under the Commercial Paper Article for one to be a holder of order paper. Only answer (c) states both are required.

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33. (b) To be a holder in due course, one must have possession of a negotiable instrument and meet three additional tests: give present value, in good faith and without notice of any problems. Answer (a) is incorrect because one may be a holder in due course of order paper. The note does not need to be payable to bearer. Answers (c) and (d) are incorrect because one can be an HIDC without all prior holders being an HIDC and without being the payee. As long as the note is negotiable and the three tests are met, the holder is an HIDC.

34. (d) The value requirement can only be met by the giving of present value, not future value. Thus, the promise to perform services in the future is not the giving of present value. Answers (a), (b) and (c) are incorrect because they all involve some form of giving present value.

35. (d) Specifically, notice that an instrument was overdue by three weeks would prevent a party from being an HIDC. Answer (a) is incorrect because commercial paper is almost always purchased at a discount. There is always risk the issuer may not be able to pay. The mere fact that it was sold at a discount would not put a party on notice that there was a problem. Answers (b) and (c) are incorrect because a negotiable instrument may be given as collateral for a loan and may be payable to bearer without affecting whether a party is an HIDC.

36. (a) To be an HIDC, a party must take the instrument without notice of any problems. If a holder was notified that payment was refused, they would certainly have notice that there was a problem. Answer (b) is incorrect because notification that one of the prior endorsers was discharged would not constitute notification that there was a problem. Only that party would be discharged and the instrument could still be valid. Answer (c) is incorrect because a negotiable note may be given as collateral for a loan without there being a problem. Answer (d) is incorrect because commercial paper is almost always purchased at a discount. There is always risk the issuer may not be able to pay. Thus purchase at a discount does not constitute a problem.

37. (d) Real defenses that would beat an HIDC include Infancy, Material alterations, Bankruptcy, Insanity when adjudicated, Forgery, and Fraud in the execution (I’M BIFF). Duress may be a real defense if it would make the contract void. Bankruptcy, forgery and fraud in the execution are all real defenses, making (a), (b) and (c) incorrect. Lack of consideration is not a real defense.

38. (b) Real defenses that would beat an HIDC include Infancy, Material alterations, Bankruptcy, Insanity when adjudicated, Forgery, and Fraud in the execution (I’M BIFF). Duress may be a real defense if it would make the contract void. A breach of contract is not a real defense. Only answer (b) states that Material alterations and Bankruptcy are real defenses, but breach of contract is not.

39. (d) Real defenses that would beat an HIDC include Infancy, Material alterations, Bankruptcy, Insanity when adjudicated, Forgery, and Fraud in the execution (I’M BIFF). Duress may be a real defense if it would make the contract void. Infancy, forgery and bankruptcy are all real defenses, making (a), (b) and (c) incorrect.

Nonperformance of a condition precedent is not a real defense.

40. (a) The instrument is a promissory note because it is a promise to pay. Helco is promising to pay Astor or bearer. Answers (b) and (c) are incorrect because both a sight draft and a check are types of drafts, wherein a drawer orders a drawee to pay a payee. Helco did not order a third party to pay, they promised to pay. Answer (d) is incorrect because a trade acceptance is also a type of a draft and this is a promissory note.

41. (c) To be negotiable an instrument must be signed by maker or drawer, be unconditional, be payable in a certain sum of money, be payable to bearer or order and be payable on demand or at a definite time. This instrument meets all five requirements. Specifically, an instrument is negotiable if the maker has the right to extend payment from one definite time to another definite time (March 12 to March 31). Answer (a) is incorrect because a note may make reference to the reason it was written without making it nonnegotiable. If the note had said it was subject to the terms of the computer agreement it would be nonnegotiable. Answer (b) is incorrect because it is still negotiable if the words and numbers differ. The words would control. Answer (d) is incorrect because once a note is negotiable on its front, it is always negotiable. An endorsement on the back to Willard would not make it nonnegotiable.

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42. (b) Since Stone endorsed the note "pay to the order of Willard Bank, without recourse", it is order paper.

Order paper requires delivery plus an endorsement for negotiation. Thus, Willard must endorse the note to negotiate it. Answer (a) is incorrect because "without recourse" is a qualified endorsement and does not prevent a party from being an HIDC. Since Willard paid present value ($3,900), in good faith and without notice of any problems, Willard is an HIDC and (c) is also incorrect. Answer (d) is incorrect because a note payable to "Astor or bearer" is bearer paper and can be negotiated by delivery alone. Thus, the absence of Stone’s endorsement would not prevent Willard from being an HIDC because it would not be missing a signature.

43. (d) An HIDC in nonconsumer transactions takes the instrument free of all personal defenses and only loses to a real defense. Willard Bank is an HIDC because the note is negotiable and Willard paid present value ($3,900), in good faith and without notice of any problems (to specifically include the alleged breach of the computer contract). The alleged breach of the computer contract is a personal defense and not a real defense.

Thus, Helco is liable to Willard because Willard is an HIDC. Answer (a) is incorrect because Willard is an HIDC.

Answer (b) is incorrect because the breach is a personal defense and Willard was without notice. Answer (c) is incorrect because Helco is liable to Willard.

44. (c) Real defenses that would beat an HIDC include Infancy, Material alterations, Bankruptcy, Insanity when adjudicated, Forgery, and Fraud in the execution (I’M BIFF). Duress may be a real defense if it would make the contract void. Answers (a), (b) and (d) are incorrect because infancy, bankruptcy and duress that would make a contract void are real defenses that would defeat an HIDC. The wrongful filling-in of the amount payable that was omitted from the instrument would be a material alteration due to the negligence of the drawer. If the drawer is negligent, the HIDC can collect whatever amount is filled-in. Thus, the HIDC would take free of this defense.

45. (b) Industrial can only qualify as an HIDC for $1,000. When Industrial paid the $1,000 present value was given, Industrial had good faith and they had no knowledge of any problems at that time. Answer (a) is incorrect because the mere fact that the note was purchased at a discount does not give notice that there is a problem. A note is almost always purchased at a discount because there is always risk the maker may default.

Answers (c) and (d) are incorrect because when the final $2,000 payment was made by Industrial there was knowledge of fraud and thus, Industrial no longer qualified as an HIDC and can only collect $1,000.

46. (c) Ott is an HIDC to the extent of $3,000. When the $3,000 was paid Ott had given present value, in good faith and without notice of any problems. Once Ott learned of the theft, Ott had notice of a defense and no longer qualified as an HIDC. Only HIDC’s take free of a personal defense like theft and Ott can, therefore, only recover the $3,000 and no other amount.

47. (a) Since Wilk is an HIDC, Wilk would take the instrument free of the personal defense of fraud. The only type of fraud that defeats an HIDC is fraud in the execution and that is not present. Thus, answer (d) is incorrect.

Since Monk acquired the note from Wilk, Monk will have the standing of an HIDC under the shelter rule and will also take the note free of the defense of fraud. One who takes from an HIDC gets all of the rights of an HIDC.

Thus, answer (a) is correct and (b) is incorrect. Answer (c) is incorrect because an HIDC must be without notice of problems and Monk knew of the fraud.

48. (b) To be a holder, one need only possess a negotiable instrument with all necessary endorsements. To be a holder in due course one must possess a negotiable instrument, give present value, in good faith and without notice of any problems or defenses. Answer (d) is incorrect because one who gave value for the instrument, in good faith and without notice of any defects is a holder in due course. Answers (a) and (c) are incorrect because anyone who takes from a holder in due course acquires the rights of a holder in due course, even if they do not qualify as a holder in due course. Answer (b) is correct because one who found a bearer instrument cannot be a holder in due course (they did not give value for the instrument). Likewise, they did not acquire the rights of an HIDC because they did not acquire it from an HIDC.

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49. (c) With a material alteration of the amount to be paid, an HIDC can only collect the original, unaltered amount where no negligence of the drawer is involved. If the drawer were negligent, an HIDC could collect the altered amount. Bay is an HIDC because Bay gave present value, in good faith and without notice of any problems. Since there is no indication that Tell was negligent, Bay can only collect the original amount of $900 and not $1,900. Answer (a) is incorrect because Bay can collect the original amount of $900. Answer (b) and (d) are incorrect because a bank must obey a customer’s order to stop payment. If the stop payment order were improper, Bay only has an action against the drawer not the bank.

50. (d) With a material alteration of the amount to be paid, an HIDC can only collect the original, unaltered amount where no negligence of the drawer is involved. If the drawer were negligent, an HIDC could collect the altered amount. Josephs is an HIDC because Josephs paid present value, in good faith and without notice of the alteration. Cobb was negligent in giving Garson a blank check and thus, would be liable to Josephs for the full

$1,000. Answers (a), (b) and (c) are incorrect because Josephs can collect the full $1,000.

51. (a) Drake is an HIDC because Drake paid present value (antecedent debt), in good faith and without notice of any problems. The back of the instrument contained an endorsement from Carr to "pay to the order of Drake". This made the instrument order paper and Drake was required to deliver and endorse the instrument to negotiate it, making (c) incorrect. Drake transferred it to Hunt by mere delivery without endorsement. Hunt can not be an HIDC because the instrument is missing Drake’s signature, thus making answer (d) incorrect. Hunt has the standing of an HIDC under the shelter rule because Drake was an HIDC.

Additionally, when one transfers without endorsement and their signature is needed, their immediate transferee has the right to their unqualified endorsement. Thus, Hunt has the right to Drake’s signature, making (a) correct.

Answer (b) is incorrect because taking an instrument in satisfaction of an antecedent debt does qualify as present value.

52. (d) Dodson negotiated a bearer note to Mellon without endorsement and by mere delivery. One who transfers without endorsement has no contract liability and makes warranties only to their immediate transferee. Thus, Dodson has no contract liability and no warranty liability to Bloom. Mellon transferred the note to Bloom by blank endorsement. Thus, Mellon has secondary liability to Bloom as an endorser and became liable upon presentment and notice of dishonor. Only answer (d) reflects this liability.

53. (c) Canceling or crossing out a prior party’s endorsement discharges that endorser from liability to later endorsers. Thus, the crossing out of Betty Ash’s endorsement released her from secondary liability to later endorsers. Answers (a), (b) and (d) are incorrect because the crossing out of a party’s endorsement only releases that party. It does not release any other endorser.

54. (c) An oral renunciation of that party’s liability does not discharge that party. Answers (a), (b) and (d) are incorrect because good faith payment, cancellation of a prior party’s endorsement and the intentional destruction of the instrument by the holder all will result in a discharge of a prior party.

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Chapter Four: Negotiable Instruments